New York may be considered hot among many investors, but for Synapse Development Group founder and CEO Justin Palmer, San Francisco’s existing building stock is where the next big investment opportunities are, especially for those willing to wait for them.

In New York, the market started to come out of the downturn in 2010 and achieved pricing never before seen. Land prices skyrocketed from $300/SF to $800/SF for new development sites. That movement happened so quickly because of the fast permitting process and the amount of capital willing to invest, Palmer said.

“New York land prices are overpriced,” Palmer said. “We haven’t acquired anything in New York since 2013.”

In San Francisco, land prices have been rising, but have not increased as much because of the permitting and entitlement challenges, he said. San Francisco sellers have high expectations for land prices, but are asking 15% to 20% more than what is realistic, according to Palmer. These sites often sit for a long time, and investors like Synapse wait until pricing becomes more realistic, Palmer said.

Construction costs also remain a challenge and contractors are struggling to find resources to meet schedules, and costs continue to go up.

“In 2018 it will get harder before it gets easier,” Palmer said. “The labor shortage in construction is really going to present some challenges and just cause delays and potential cost increases.”

By 2020, he expects the market will normalize as more resources open up and fewer projects are under construction. He said he does not expect a major slowdown, but for the market to level out in the next three to five years. Synapse’s acquisition strategy is patience and waiting for the right opportunities.

Palmer said Synapse has scaled back on looking at new development sites. It shifted focus toward acquisitions of existing buildings that need repositioning or renovations, such as 944 Market St., which it acquired in 2016. This property will be renovated from a Class-B to a Class-A- office asset.

Renovation projects will still require patience with the labor shortage and often make projects take longer, but these projects will provide some of the better opportunities, he said. Prop M’s cap on new office development will eventually limit office supply. With renovations, building owners do not need to wait for an allocation.

Synapse also is finishing construction on its first San Francisco Yotel a few blocks away in Mid-Market. Palmer said a lot of investors and developers have shifted focus to hotels, since there has not been much new supply. There are a lot of sites in the permitting and entitlement stages, but not all projects have been financed this cycle. For Synapse, existing office and retail provide more opportunities.

At 944 Market St., Synapse is repositioning the building with ground-floor retail and is in talks with several fashion brands to occupy the space. The site gets a lot of foot traffic and is near Union Square without the high price tag of Union Square rents.

“Our location is a bit edgy, and we prefer that,” Palmer said.

Synapse tends to prefer neighborhoods in transition, especially when it may take five to 10 years for that area to realize its value. The company is a big believer in Mid-Market, Palmer said.

“The stretch of Mid-Market with its proximity to Union Square and the central business district and public transit is inherently undervalued,” Palmer said. “Part of what we’re doing is building it up to invest in the community to help it reach its full potential.”